Although leasing is still the dominant method of commercial van and truck acquisition, its lack of flexibility and early-exit penalties are driving many businesses to explore long-term rental
Many businesses that have seen contract terms for their goods or services shrink from three years or longer before the recession to 12 months now are having to reconsider van and truck acquisition policies, based around 36-month contract hire deals.
The solution, for a growing number of firms, is flexible long-term rental, says Stuart Russell, specialist vehicle director of Europcar, which has 8,000 vehicles in its van hire fleet, with utilisation running at 82%.
Enterprise Flex-E-Rent managing director Danny Glynn agrees: “We have witnessed continuous year-on-year growth in long-term rental since 2010.
“Long-term rental allows our customers to adapt to fluctuating or seasonal demands without incurring penalty charges or committing to a significant purchase which might result in vehicles standing idle for long periods.”
Rental companies have adapted their fleets to accommodate this changing demand for more bespoke vehicles. The Flex-E-Rent fleet now has 25,000 trucks, vans, cars and minibuses, including 400 accessible minibuses, for example.
Meanwhile, commercial vehicle fleet management company Fraikin has introduced a new service in response to the trend towards long-term rental.
Operations director Mark Newnes says: “We’re certainly seeing increased interest in long-term rental and we’ve developed a package called Xtend in order to cater for it.”
Long-term rental’s big advantage over contract hire is it is easier to return the vans and trucks when you no longer have a use for them. However, this flexibility comes at a cost.
“Long-term rental rates are approximately 10% more than contract hire rates,” says Russell.
Carlos Montero is commercial director at vehicle management specialist FleetEurope. “Contract hire is probably 10-20% cheaper than long-term rental, broadly speaking, although it’s not always easy to make a direct comparison,” he says. “With long-term rental, however, you can turn the tap on and off more quickly.”
However, this flexibility is not absolute and is certainly not designed to allow firms to take delivery of a vehicle on a discounted long-term rental rate on a Monday, then send it back the following Friday.
“If you’re talking about a standard van then you normally have to take it for at least a month,” says Montero.
Europcar expects the hirer to keep the vehicle for at least three months, says Russell. Return it earlier and a penalty will be levied. Such penalties usually involve recouping the difference between the discounted rate the customer has been paying and the spot hire rate they would have been paying if a lower long-term rate hadn’t been negotiated.
Fraikin expects customers who take vans or trucks under its Xtend scheme to hold on to them for 12 months. If you want to return them earlier, then you have to give a month’s notice and the long-term rate you have been paying will revert to a pre-agreed short-term hire charge.
Xtend clients can, however, avail themselves of a variety of benefits, not least having 24/7 online access to all the records relating to the vehicles they have hired.
Does long-term rental have legal implications?
Rental trucks have to be specified on the O-Licence, which must have sufficient ‘margin’ to accommodate them.
O-Licence holders must ensure their vehicles are maintained properly and that statutory inspections are carried out at the specified intervals. They must also be in a position to produce all the pertinent records should the Driver and Vehicle Standards Agency (DVSA) request them.
Fraikin can supply rented vans and trucks in plain white without Fraikin logos. Not all renters want their customers to know they are using hired assets.
Furthermore, Xtend customers can enjoy a 10% discount on the rate they pay for any additional vehicles they may need to spot-hire for a few days.
Fraikin charges only slightly more for long-term rental than contract hire – also a major area of activity for the group. While Newnes emphasises that many customers remain rental-only, he acknowledges that, to a degree, it views rental as a means of funnelling customers towards its contract hire packages, which may explain the modest price differential.
“The cut-off point for long-term rental is two years,” says Montero. “After that, you should be looking at contract hire.”
Businesses may require vehicles to be kitted out with equipment. Highly bespoke conversions may be problematic because it may be difficult for the rental company to hire out the vans or trucks to another client if they are sent back.
Load area racking, tow-bars, roof racks and cab-top beacons can all be installed and clients can have their livery applied using adhesive vinyl, but the price of doing so has to be added to the regular rental, says Russell.
“As a consequence we would look for the customer to commit to taking the vehicles for, say, two years to cover the cost,” he says.
Although this may appear to blow a hole in any claim rental has to flexibility, there is a way around it if the hirer funds modifications up-front. Many companies, especially those that are cash-rich, are apparently more than happy to do so.
What do the rental payments cover?
Europcar bases its rates on the annual mileage projected by the operator when the rental agreement is entered into.
“We do not do unlimited mileage rental deals,” says Russell. So what do the rental payments cover, aside from the vehicle itself?
“Servicing it, taxing it, MOT testing it if necessary, replacement tyres, a breakdown service and a replacement vehicle if the one supplied is off the road,” says Russell.
Fuel, insurance (which can be included for an additional fee) and the provision of a driver are the main exclusions. Damage due to the driver is also excluded.
Rental fleets may insist that only certain workshops are permitted to service their vehicles and the choice is often narrower than that offered by contract hire companies, cautions Montero. “Some of the rental companies can arrange mobile servicing, however,” he adds.
A key reason for the appeal of long-term rental is the ability of the hire fleets to provide popular configurations of vehicle – 7.5-tonne curtainsiders, for example – almost immediately.
“If you pick up a contract because a competitor has just gone bust then you may need, say, 10 18-tonners quickly,” says Dawsongroup group managing director Steve Miller. Rental can invariably respond, although such short-notice requests may be a challenge for hirers to fulfil in busy periods, such as the run-up to Christmas.
With 15,000 trucks, trailers and vans on its books across 23 locations – seven dedicated to light commercials – Dawsongroup’s Dawsonrentals operation offers spot hire, long-term rental and contract hire.
What happens after the rental period ends?
Retrieving vehicles is sometimes more of a problem for rental organisations than having them returned early.
Busy operators, happy to keep making the rental payments, may not want the disruption entailed in sending them back, even though the hire company may simply be swapping them for another, newer, vehicle. But from the rental fleet’s viewpoint, getting hold of them is vital if they happen to be on a buy-back deal from the vehicle manufacturer, says Russell.
“If they are returned late, the hire fleet is penalised,” he says. “Sometimes, customers simply lose track of vans they have rented, and it can take months to get hold of them.”
Trucks are easier to keep tabs on because they are subject to regular statutory inspections. These allow mileage to be captured and any excesses to be identified.
Capturing mileage, however, is not quite so easy with light commercials because they fall outside the statutory inspection regime.
“We make sure we see our 3.5-tonners twice a year,” says Newnes. “If the mileage is or looks like becoming excessive we can, for example, suggest to the operator that the vehicle is put on a lower-mileage route in order to avoid charges.”
Dawsonrentals is rolling out a tracking system to ensure vans do not vanish, with 20% of the fleet already fitted. It can capture mileage and provide the customer with management information. The unit can be upgraded to a driver behaviour monitoring package, which could benefit operators through lower fuel bills – for an additional charge.
Rental vehicles are worked hard and are likely to suffer damage. Fraikin is among the hire fleets that use the fair-wear-and-tear guide produced by the British Vehicle Rental and Leasing Association (BVRLA) to determine what is chargeable and what is not.
Minor scratches will be ignored – commercial vehicles are working tools after all – but a big dent in a cab door would have to be rectified.
Long-term rental vs outright purchase
Northgate is one of the pioneers of long-term rental, with a 55,000-strong rental fleet, more than 90% of which are commercial vehicles grossing up to 7.5 tonnes. It cites its client, Fabrifen, as an example of the savings that can be made by businesses switching from owning vehicles outright to long-term rental.
Fabrifen, a steel and timber product manufacturer, supplier and installer with locations in Salford, Greater Manchester, and Widnes, Cheshire, has managed to cut its outgoings by more than £6,000 a year, says Northgate. The saving has come about partially as a result of reductions in maintenance and administration costs and lower fuel bills.
“Replacing our ageing vehicles with new ones has improved fuel consumption by 10%, which equates to more than £350 a month,” says Fabrifen managing director Tony Ross. “During our shut-down period over Christmas, we were able to save approximately £1,900 thanks to the flexibility of being able to off-hire vehicles without penalty.”
Cheshire-based shop merchandiser Momentum Instore says administrative convenience and the efficiency of the online service is a key reason why it hires vehicles from Europcar.
“The demands of our business can be extremely changeable,” explains Momentum Instore fleet administrator Helen Brislane. “As a consequence, our rental needs can change at a moment’s notice, say 30 vehicles in less than two days.
“However E-Biz, Europcar’s online reporting system, makes bookings and amendments easy,” she says. “Furthermore, we often use the Live Hire reporting system to help maximise our efficiency and reduce fleet running costs by making sure vehicles are delivered and collected at pre-arranged times.”
Exception reports have allowed Momentum to identify and resolve operational issues immediately, Brislane adds.
Rental fleets are determined to take advantage of changing attitudes among corporate customers. Though perhaps better known for its contract hire activities, Fraikin spent £13 million on acquiring rental vehicles last year and now operates a fleet of more than 1,000 vehicles across nine locations. Utilisation rates stand at more than 80%.
“We can provide trailers and we run a centralised booking operation,” says Newnes. “This means that a national customer who needs 10 rental vehicles in 10 different locations only needs to make one call.”
Other companies are also expanding their rental activities and related support facilities. SHB Hire is beefing up its depot network, with the purchase of a five-acre site in Gloucester that should be open in six to nine months. It will be the biggest branch in the company’s 14-strong network and will replace SHB Hire’s existing depot in the city.
The firm has already expanded sites in Ashford, Kent, and Newcastle-upon-Tyne and opened a new bodyshop at its Thetford branch.
Budget put 500 Volkswagen Transporter and Caddy vans into service last year with an eye to fulfilling the needs of businesses as well as consumers. One hundred of the Transporters were used to launch a new light commercial rental service in London. Earlier this year, it added 100 Mercedes-Benz Citan vans to its fleet.
Moving back up the weight scale, the Fraikin fleet embraces everything from 3.5- to 44-tonners. “Our main area of activity revolves around 7.5- and 18-tonne boxes and curtainsiders although the boom in home delivery is resulting in increased interest in 3.5-tonners,” says Newnes.
Everything is purchased outright. “We keep the trucks for five to six years and the 3.5-tonners for around four years,” he adds.
One of the key advantages of running a rental fleet, says Newnes, is it gives Fraikin a means of re-deploying vehicles released from contract hire early.
“If, for example, we have a contract hire client who wants to move from 7.5-tonners to 12-tonners part-way through an agreement, we can take the 7.5-tonners back and put them out on rental without penalty,” he says.
Price rises affect rental rates
There’s been a small increase in the ceiling price that can be charged, according to Newnes.
“I certainly wouldn’t class it as dramatic,” he says. “We’re paying more for the Euro 6 trucks than we did for the Euro 5s, but, unfortunately from our viewpoint, we’ve not been able to recover all of the difference by putting up the rate.”
Nor is rental having things all its own way. While the BVRLA reports that van leasing and rental both grew strongly in 2015 and there is a slight swing towards rental, leasing still dominates its members’ activities. The association says several of its members are enjoying strong growth in truck contract hire.
Aware of the challenge posed by long-term rental, contract hire-only providers are fighting back.
“We’re seeing them offer shorter contracts, more break clauses and a lot more flexibility overall,” says Miller. “Contract hire is very different to what it used to be.”
He suggests the lines between long-term rental and contract hire are becoming increasingly blurred.
“The key difference now is between ownership and usership,” says Miller. Businesses are increasingly realising that they do not need to own an asset in order to use it. “Owning vehicles is fast becoming a vanity project,” he adds.